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Analysts say proposed Landry's-Caesars merger would boost earnings

Updated: Oct 21, 2018

The proposed merger of Caesars Entertainment Corp. with Tilman Fertitta’s Landry’s Inc. would boost earnings of the enlarged company through cost-cutting and leveraging loyalty programs, Wall Street analysts said.

However, the combined company would need to sell some property, including casinos, to reduce high debt levels, they said.

News agencies on Wednesday reported that Fertitta approached Caesars about a merger, offering to add the gaming giant to his casino and restaurant business for cash and shares. Fertitta, who also owns the Houston Rockets National Basketball Association franchise and is a cousin to Station Casinos CEO Frank Fertitta III, would then become chairman and CEO of the combined company.

SunTrust Robinson Humphrey analyst Barry Jonas said in a note to investors Wednesday evening that the contract of Caesars CEO Mark Frissora expires in February.

Landry’s owns five casinos, four of which are located in cities where Caesars has a presence, enabling the enlarged company to generate “meaningful cost synergies,’’ Jonas said.

Caesars may be able to drive some of its loyalty members to the acquired properties, the analyst said, pointing to the significant increase in earnings at Planet Hollywood and Flamingo after they were acquired by the gaming giant.

A JPMorgan analyst put the potential increase in earnings from cost-cutting and loyalty programs at between $100 million and $200 million a year.

Landry’s debt is about $4 billion, according to published reports, while Caesars’ is $9 billion. The combined company would have a leverage ratio of about 5.5 times, high by industry standards, JPMorgan analyst Daniel Politzer said in a note to investors Thursday morning. Caesars could sell the wholly owned real estate to cut debt, Politzer and Jonas said.

“We assume that Fertitta could help finance the transaction with sale leasebacks at some casino properties (Las Vegas, Laughlin, Atlantic City), and the combined entity would also likely divest an Atlantic City property. We assume Bally’s, as it is the smallest contributor,’’ Politzer said.

Caesars has already sold some of its properties to VICI, a real estate investment trust focusing on the gaming industry, to cut its debt.

Credit Suisse analyst Cameron McKnight said he expects more consolidation in the gaming industry. Politzer said other companies may also seek to scoop up Caesars.

Both analysts said the merger report underscores the cheap share price of gaming companies. The shares of major Las Vegas gaming operators have tumbled more than a quarter from their 2018 peak.

“We believe the overarching takeaway is that strategic and financial buyers recognize the seemingly silly valuations most operators have traded to in the recent swoon,’’ Politzer said.

Shares of Caesars rose 5 cents, or 0.5 percent to $10.25 Thursday, outperforming most U.S. stocks.

By Todd Prince / Las Vegas Review-Journal

October 18, 2018 - 6:31 pm

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